Effect of Coffee Production on Uganda’s Foreign Exchange Revenue (2000-2018)

Abstract

The main objective of the study was to investigate the effect of coffee production on Uganda’s foreign exchange revenue for the period 2000 to 2018. The hypotheses tested were that; there is no significant effect of nominal effective exchange rate, quantity of coffee exported, world price of coffee, foreign exchange revenue, inflation rate and real interest rate on Uganda’s foreign exchange revenue. Quantity of coffee exported was used as an independent variable to examine the effect of coffee production on Uganda’s foreign exchange revenue since almost all of the coffee produced in Uganda is exported and also foreign exchange revenue is obtained from the coffee that is exported. The study used time series data from the World Bank, Bank of Uganda and Uganda Coffee Development Authority. The Augmented Dickey Fuller (ADF) unit root test for stationarity was employed in this study to test the stationarity. The data shows non-stationarity after taking the first difference. Regression analysis was applied to investigate and build a model for explaining the variation in foreign exchange revenue. Foreign exchange revenue was considered as the dependent variable in this study. The results show that the quantity of coffee exported, world price of coffee and nominal effective exchange rate have a positive and statistically significant effect on Uganda’s foreign exchange revenue. Real interest rate has a negative and a statistically significant effect on Uganda’s foreign exchange revenue. Inflation rate has a negative and statistically insignificant effect on Uganda’s foreign exchange revenue. Since the quantity of coffee exported has a significant effect on foreign exchange revenue, the government should increase coffee production through research and provision of better quality seedlings since coffee is the country’s major agricultural export. This will enable the country to be able to meet the demand and compete with other coffee producing countries favorably and also increase the country’s competitiveness thereby increasing foreign exchange revenue. In the view of world price of coffee, the exporters should initiate the establishment of agreements with international coffee buyers. This will help in increasing coffee prices thereby increasing foreign exchange revenue. Nominal effective exchange rate should not be given gap to depreciate as this will lead to a decrease in foreign exchange revenue. Also the interest rate on loans should not be allowed to increase to enable producers and exporters to raise their financial requirements to increase coffee production and exports of coffee hence increasing foreign exchange revenue.